IFRS for SMEs:
Inventories

Definition of Inventories
- Tangible assets held for sale in the ordinary course of business (regardless of the value of each asset)
- Raw materials, work-in-progress and finished goods in manufacturing businesses.
   - Raw materials: Tangible ingredients needed to make a product
   - Work-in-progress: A product which is in the process of production, but not yet completed
   - Finished goods: A product which has been fully produced, and is in selling condition
- Materials to be used up in the process of providing goods and services

- Low value tangible assets, and other tangible assets expected to be used up within 12 months of obtaining it, even if it's not in the process of providing goods and services.

 

Measurement
- Inventories are measured at the lower of cost and net realisable value. 
- Net realisable value is the estimated selling price minus costs incurred to complete and sell the inventory.

 

Cost of Inventories
- Cost includes all costs incurred to obtain and bring the inventory item to the condition and location of sale or use.
- Cost of converting raw materials into finished goods. This includes direct (material and labour) and indirect costs (production overheads).
- If any taxes paid in the process of obtaining the inventory are refundable, they shouldn't be included in cost.
- Indirect fixed production overheads are allocated to inventory based on the normal capacity of the production facility, when production is abnormally low.
- Normal capacity is the number of units of a product that can be produced over a period of time under normal conditions.
- Indirect variable production overheads are allocated based on the actual number of units of a product that is produced.

 

Costs Excluded from Inventories
- Abnormal waste: unexpected and significant material, labour or other production costs that are lost/wasted.
- Storage costs
- Selling costs (costs incurred to sell a product, after it has been brought to general selling condition)
- Administrative overheads costs (which are not production costs)

 

Flow of Cost
- Cost flow assumptions have to be used in determining the cost of units of inventory that cannot be separately identified, and are interchangeable, but have different unit costs.

- Separate identifiability depends on how inventory is tracked. If a certain type of inventory is tracked together, then they are not separately identifiable.
- First-in First-out (FIFO) and Weighted Average Cost (AVCO) can be used. Last-in First-out (LIFO) is not allowed.

 

Valuation

- If actual cost of inventory cannot be determined, other valuation techniques, such as standard cost method, retail method and most recent price can be used.

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Impairment
- If the cost of an item of inventory recorded is higher its net realisable value, then the recorded cost of the item has to be decreased.
- This decrease in cost has to be charged to the income statement as Impairment Loss expense.
- This check should be done periodically. 
- If the cost of an item is found to be recorded at a value which is lower than the 'lower of original cost and net realisable value', then the cost can be increased by the difference.
- This increase in cost has to be charged to the income statement as Impairment Gain income.

 

Derecognition
- An inventory can be expensed if it is used up, lost or its control has been transferred to another person
- If an income is associated with the loss of an inventory item, then the income has to be recognized in the same period as the expense
- If an inventory is used in the production of, or to bring improvements to, a tangible non-current asset, its cost can be added to the cost of the non-current asset.